A currency trader checks monitors at a foreign exchange company in Tokyo. / Koji Sasahara, AP

by John Waggoner, USA TODAY

by John Waggoner, USA TODAY

Even as you read this, international fund managers are trying to remember something from long ago, lodged deep within the recesses of their memories. The battle of Actium? No, no, that's not it. The Defenestration of Prague? Nope. Wait ‚?¶ ah, that's it. Japan.

You may recall Japan. Island nation. Population 127 million, 10th-largest in the world. Gross domestic product of about $6 trillion, third-largest in the world.

The odds are good, however, that your international stock fund manager would like to forget Japan. Japan's Nikkei stock average has fallen 66% in the past quarter-decade, and its economy has been moribund for about that long. But a combination of factors has sent Japan's stock market soaring this year, and some managers who haven't glanced at Japan in two decades are starting to take another look.

The past 25 years, international funds have crushed their typical index benchmark, the MSCI Europe, Australasia and Far East index. The Lipper International Fund index has gained 425% the past quarter-century, vs. 261% for EAFE.

Beating the Standard & Poor's 500-stock index over the long term has been a Herculean task for most managers. Why has it been so easy to beat EAFE? One word: Japan. Simply avoiding Japan has, in large part, been a recipe for relative success for many fund managers. EAFE minus the Japanese market has gained 670% the same period.

Not surprisingly, the number of Japan funds have dwindled, as have assets in the funds. Currently, there are just 25 Japan funds; the largest has assets of $1 billion. For many diversified international fund managers, Japan simply wasn't worth looking at. "I've been in the business for 26 years, and for the first 20 years, I had little or nothing in Japan," says David Herro, manager of Oakmark International fund.

But a sleeping giant has awakened. MSCI's Japan index has gained 19.6% this year, vs. 13% for the Dow. That's the return to U.S. investors in dollars. In Japanese yen, the MSCI's index is up 34.7%. The reason for the difference: The yen has weakened against the dollar, which makes Japanese goods cheaper to U.S. investors but hurts returns for U.S. investors in Japan.

The yen's tumble has been purely intentional. The Japanese government sees a weak yen as an advantage to its manufacturers, who are primarily exporters. But the weak yen is also a byproduct of the Japanese government's determination to fight persistent deflation - a period of falling prices.

The problem with deflation is that it feeds upon itself. Consumers don't want to buy new goods, because they know they will get cheaper prices later. As business activity falls, unemployment rises, because no one is buying anything. And for those with jobs, wages remain stubbornly stagnant.

To combat a strong yen and a deflationary economy, the Japanese government has decided to try to inject a little inflation, by slashing already low interest rates and by purchasing longer-term bonds with newly minted yen. (It's a page from the Federal Reserve's playbook.)

But that's just one part of the Japan story. Neil Hennessy, chairman and chief investment officer of the Hennessy funds, says that the government has also been actively promoting Japanese business - for example, by relaxing restrictions on Chinese tourism.

And, despite considerable enmity between China and Japan, Japanese goods are in big demand in China, Hennessy says. "There are 300 million people in the Chinese middle class, and they want everything from watches to feminine hygiene products," Hennessy says. "They need what the Japanese have."

Furthermore, Japan's stock market is at a relatively sweet spot after a quarter-century of woe. "The problem used to be that prices were too high and quality was too low," says Oakmark's Herro. By quality, he's not talking about Japanese products, but by the quality of their corporate structure. After Japan's earthquake and tsunami, however, prices hit rock bottom, and corporate governance started to improve as well, Herro says.

At Toyota, for example, the newest CEO is relatively young, although still the grandson of the founder. "But when he comes in, he sheds half the board of directors and addresses problems instead of sweeping them under the rug."

And Japanese stock prices, once famous for nosebleed valuations, have fallen to earth, with many selling at or below book value - the value of the company's assets, minus intangibles, such as goodwill and wishful thinking.

For investors, of course, the question is whether to chase Japan's market, which is still far below its 1989 high - but has had a considerable run-up nonetheless. Fans of index funds could simply buy the iShares MSCI Japan Index ETF.

You could also let your fund manager do the work for you. Most large-company international funds remain underweight Japan. For those that have started investing in Japan, it's somewhat of a novelty to have an above-average weighting in Japan. "I'm overweight Japan for the first time in 27 years," says Herro.

His favorite stock: Daiwa Securities. "You get good exposure to the Japanese market, and it's still at a reasonable price - about a third of book value," he says. Other favorites, such as Toyota and Honda, are obvious beneficiaries of a weaker yen.

Japan still has plenty of problems: Deflation is by no means whipped yet, and its population continues to decline. But if Japan is indeed on track to recovery, your best bet is probably to wait for your international fund manager to do the work for you. Buying any individual country fund is a large risk unless you have deep familiarity with the country.

But if you're looking for an international fund now, you might want to see if it has rediscovered Japan.